Okta Inc

1. Overview and Basis of Presentation

Description of Business

Okta, Inc. (the “Company”) is the leading independent identity partner. The Company’s Workforce Identity Cloud and Customer Identity Cloud, powered by Auth0, enable customers to securely connect the right people to the right technologies and services at the right time. Employees and contractors sign into the Workforce Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use the Company’s Identity Platform to collaborate with their partners, and to provide their customers with more modern and secure experiences in the cloud and via mobile devices. Developers leverage the Workforce Identity Cloud and Customer Identity Cloud to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core missions. The Company is headquartered in San Francisco, California.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim periods. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements. All intercompany balances and transactions have been eliminated in consolidation. The Company conducts business globally and is managed, operated and organized by major functional departments that operate on a consolidated basis. As a result, the Company operates inone reportable segment.

The condensed consolidated balance sheet as of January 31, 2024, included herein, was derived from the audited financial statements as of that date. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the results of operations for the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2025 or any future period.

The Company’s fiscal year ends on January 31. References to fiscal 2025, for example, refer to the fiscal year ending January 31, 2025.

Certain prior period amounts have been reclassified to conform to the current period presentation.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2024.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are based on historical experience and on other assumptions that management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the valuation of deferred income tax assets, uncertain tax positions, assets and liabilities acquired in business combinations, and loss contingencies related to litigation.

2. Accounting Standards and Significant Accounting Policies

Significant Accounting Policies

For a summary of the Company’s significant accounting policies refer to “Note 2. Summary of Significant Accounting Policies” of its Annual Report on Form 10-K for the fiscal year ended January 31, 2024.

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued guidance which requires disclosure of incremental segment information on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. The Company plans to adopt this guidance in fiscal 2025 and does not expect a material impact to its consolidated financial statements.

In December 2023, the FASB issued guidance to provide disaggregated income tax disclosures on the rate reconciliation and income taxes paid. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company intends to adopt this guidance in fiscal 2026 and expects the adoption of the updated guidance to result in disclosure of additional disaggregated tax information.

In November 2024, the FASB issued guidance requiring the disclosure, in the notes to financial statements, of specified disaggregated income statement expense information. This guidance is effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this guidance.

3. Restructuring and Other Charges

During the fourth quarter of fiscal 2024, the Company approved a restructuring plan (the “2024 Restructuring Plan”) intended to improve operating efficiencies and profitability. The 2024 Restructuring Plan involved a reduction of the Company’s workforce by approximately 400 full-time employees. The 2024 Restructuring Plan was substantially complete by the first quarter of fiscal 2025 and the Company recognized aggregate restructuring costs of$24 million in the fourth quarter of fiscal 2024.

The following table summarizes the Company’s restructuring liability related to the 2024 Restructuring Plan that is included in Accrued expenses and other current liabilities on the condensed consolidated balance sheets:

4. Cash Equivalents and Investments

Cash Equivalents and Short-term Investments

In estimating fair value, the Company uses a three-tier fair value hierarchy as follows:

•Level 1 — Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

•Level 2 — Valuations based on other inputs that are directly or indirectly observable in the marketplace.

•Level 3 — Valuations based on unobservable inputs that are supported by little or no market activity.

The following tables present the amortized cost, unrealized gain (loss) and estimated fair value of cash equivalents and short-term investments:

The following table presents the contractual maturities of the Company’s short-term investments:

Interest receivable of $22 million and $20 million is included in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of October 31, 2024 and January 31, 2024, respectively.

The Company had 33 and 41 short-term investments in unrealized loss positions as of October 31, 2024 and January 31, 2024, respectively.

For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. There wereno material credit or non-credit related impairments for short-term investments as of October 31, 2024 and January 31, 2024.

Strategic Investments

Strategic investments primarily include equity investments in privately-held companies, which do not have a readily determinable fair value. As of October 31, 2024 and January 31, 2024, the balance of strategic investments was $31 million and $26 million, respectively.

5. Deferred Commissions

Sales commissions capitalized as contract costs totaled $37 million in each of the three months ended October 31, 2024 and 2023, and $97 million and $102 million for the nine months ended October 31, 2024 and 2023, respectively.

Amortization of contract costs totaled $33 million and $27 million for the three months ended October 31, 2024 and 2023, respectively, and $95 million and $76 million for the nine months ended October 31, 2024 and 2023, respectively.

6. Deferred Revenue and Performance Obligations

Deferred Revenue

Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.

Subscription revenue recognized during the three months ended October 31, 2024 and 2023 that was included in the deferred revenue balances at the beginning of the respective periods was $597 million and $519 million, respectively, and $1,312 million and $1,114 million in the nine months ended October 31, 2024 and 2023, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

Transaction price allocated to the remaining performance obligations (“RPO”) represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.

Total remaining non-cancelable performance obligations under subscription contracts with customers was approximately $3,659 million as of October 31, 2024. Of this amount, the Company expects to recognize revenue of approximately $2,062 million, or 56%, over the next 12 months, with the balance to be recognized as revenue thereafter. Remaining performance obligations for professional services and other contracts as of October 31, 2024 were not material.

7. Convertible Senior Notes, Net

Convertible Senior Notes

The 2025 convertible senior notes (“2025 Notes”) and the 2026 convertible senior notes (“2026 Notes” and together with the 2025 Notes, the “Notes”) are recorded at face value less unamortized debt issuance costs. As of October 31, 2024, the 2025 Notes are classified as current liabilities due to their upcoming maturity on September 1, 2025.

During the three months ended October 31, 2024, the Company repurchased $42 million principal amount of the 2025 Notes for $40 million in cash, and $215 million principal amount of the 2026 Notes for $200 million in cash, resulting in a gain on early extinguishment of debt of $16 million.

During the nine months ended October 31, 2024, the Company repurchased $42 million principal amount of the 2025 Notes for $40 million in cash, and $258 million principal amount of the 2026 Notes for $240 million in cash, resulting in a gain on early extinguishment of debt of $19 million.

During the three months ended October 31, 2023, the Company repurchased $150 million principal amount of the 2026 Notes for $132 million in cash, resulting in a gain on early extinguishment of debt of $18 million.

During the nine months ended October 31, 2023, the Company repurchased $508 million principal amount of the 2025 Notes for $462 million in cash, and $392 million principal amount of the 2026 Notes for $341 million in cash, resulting in a gain on early extinguishment of debt of $91 million.

The net carrying amount of the Notes consisted of the following:

Fair Value Measurements

The following table presents the principal amounts and estimated fair values of the Notes, which are not recorded at fair value on the condensed consolidated balance sheets:

The estimated fair values of the Notes, which are Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of the reporting period.

8. Commitments and Contingencies

Letters of Credit

In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $7 million were issued and outstanding as of October 31, 2024 and January 31, 2024. No draws have been made under such letters of credit.

Legal Matters

From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings.

On May 20, 2022, a purported shareholder filed a putative class action lawsuit in the United States District Court for the Northern District of California against the Company and certain of its executive officers, captioned In re

Okta, Inc. Securities Litigation, No. 3:22-cv-02990. The lawsuit asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the defendants made false or misleading statements or omissions concerning the Company’s cybersecurity controls, vulnerability to data breaches, and the Company’s integration of Auth0, Inc. (“Auth0”). The lawsuit sought an order certifying the lawsuit as a class action and unspecified damages. The defendants moved to dismiss the amended complaint. On March 31, 2023, the court issued an order granting in part and denying in part the motion to dismiss. The court dismissed in full the claims based on the plaintiff’s allegations related to the Company’s cybersecurity controls and vulnerability to data breaches, and dismissed in part and denied in part the claims based on allegations related to the Auth0 integration. On February 5, 2024, the court granted the plaintiffs’ unopposed motion for class certification. On May 28, 2024, the parties entered into a stipulation of settlement, subject to court approval (the “Stipulation”). Under the terms of the Stipulation, in exchange for the release and dismissal with prejudice of all claims against the defendants, the Company agreed to pay and/or to cause its insurance carriers to pay a total of $60 million, which is covered through a combination of the Company’s Director & Officer ("D&O") insurance and the balance of the Company’s $10 million retention on the primary D&O policy. The Stipulation does not constitute an admission of fault or wrongdoing by the Company or its executives. On July 19, 2024, the court granted preliminary approval of the Stipulation, ordered that notice be disseminated to the settlement class, and set a final settlement approval hearing for November 8, 2024. On November 19, 2024, the court granted final approval of the Stipulation. The Company recognized a liability, which is included in Accrued expenses and other current liabilities on its condensed consolidated balance sheets in the amount of $60 million which represents the Company's gross obligation to settle claims under the Stipulation. A corresponding receivable was recognized, which is included in Prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets, which represents the insurance proceeds the Company is entitled to under its D&O insurance policies that will be paid by the Company’s insurers to settle claims on its behalf.

Additionally, two purported shareholders filed derivative lawsuits on behalf of the Company in the United States District Court for the Northern District of California against certain of its current and former executive officers and directors, captioned O’Dell v. McKinnon et al., No. 3:22-cv-07480 (filed Nov. 28, 2022), and LR Trust v. McKinnon et al., No. 3:22-cv-08627 (filed Dec. 13, 2022). The lawsuits allege, among other things, that the defendants breached their fiduciary duties by making false or misleading statements or omissions concerning the Company’s cybersecurity controls, vulnerability to data breaches, and the Company’s integration of Auth0. The lawsuits seek orders permitting the plaintiffs to maintain the actions derivatively on behalf of the Company, awarding unspecified damages allegedly sustained by the Company, awarding restitution from the individual defendants, and requiring the Company to make certain reforms to its corporate governance and controls. On February 22, 2023, the court entered a stipulated order consolidating the derivative actions, appointing co-lead counsel for plaintiffs, and staying the consolidated derivative actions during the pendency of the motion to dismiss in the securities class action lawsuit. The consolidated derivative action is captioned In re Okta, Inc. Stockholder Derivative Litigation, No. 3:22-cv-07480. On May 9, 2023, the court entered a stipulated order continuing the stay through the close of discovery in the securities class action lawsuit.

On April 14, 2023, another shareholder filed a substantially similar derivative lawsuit in the United States District Court for the District of Delaware against certain of the Company’s current and former executive officers and directors, captioned Buono v. McKinnon et al., No. 1:23-cv-00413. On May 31, 2023, the court entered a stipulated order whereby the defendants agreed to accept service and stay the derivative action through the close of discovery in the securities class action lawsuit.

On January 25, 2024, another shareholder filed a substantially similar derivative lawsuit in the United States District Court for the District of Delaware against certain of the Company’s current and former executive officers and directors, captioned Nasr v. McKinnon, et al., No. 1:24-cv-00106. On March 18, 2024, the court entered a stipulated order whereby the defendants agreed to accept service and stay the derivative action through the close of discovery in the securities class action lawsuit.

On July 1, 2024, another shareholder filed a substantially similar derivative lawsuit in the Court of Chancery for the State of Delaware (the “Delaware Chancery Court”) against certain of the Company’s current and former executive officers and directors, captioned Grimaldi v. McKinnon, et al., C.A. No. 2024-0685-PAF (the “Grimaldi Action”). On July 19, 2024, the Delaware Chancery Court entered a stipulated order whereby the defendants agreed to accept service and to stay the derivative action through final approval of the settlement in the securities class action lawsuit.

On October 18, 2024, another shareholder filed a substantially similar derivative lawsuit in the Delaware Chancery Court against certain of the Company’s current and former executive officers and directors, captioned Duprat v. McKinnon, et al., C.A. No. 2024-1072-PAF (the “Duprat Action”). On November 8, 2024, the Delaware Chancery Court entered a stipulated order where the defendants agreed to accept service in the Duprat Action, the Grimaldi Action and the Duprat Action were consolidated, and the consolidated action was stayed pursuant to the terms previously entered in the Grimaldi Action.

While the Company and defendants have agreed to settle the securities class action litigation, due to the stage of the related derivative lawsuits, the Company is unable to predict the outcome or estimate the amount of loss or range of losses that could potentially result from these lawsuits.

Warranties and Indemnification

To date, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying condensed consolidated financial statements as a result of its warranty and indemnification obligations.

9. Employee Incentive Plans

The Company’s equity incentive plans provide for granting stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”) to employees, consultants, officers and directors and RSUs with market-based vesting conditions to certain executives. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to eligible employees.

Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations:

The following table presents total unrecognized stock-based compensation expense related to outstanding equity awards as of October 31, 2024:

During the first quarter of fiscal 2025, the Company began funding withholding taxes due upon the vesting of employee RSUs in certain jurisdictions by net share settlement, rather than its previous approach of selling shares of the Company’s common stock. The amount of withholding taxes related to net share settlement of employee RSUs is reflected as (i) a reduction to additional paid-in-capital, and (ii) cash outflows for financing activities when the payments are made. The shares withheld by the Company as a result of the net share settlement of RSUs are not considered issued and outstanding, and do not impact the calculation of basic net income (loss) per share attributable to the Class A and Class B common stockholders.

Market-based Restricted Stock Units

In March 2024, the Company granted market-based RSUs to certain members of management. The target number of market-based RSUs granted was 183,595. One-third of these market-based RSUs vest over each of a one-, two- andthree-year performance period, each starting on February 1, 2024. The number of shares that can be earned ranges from 0% to 200% of the target number of shares based on the relative performance of the per share price of the Company’s common stock as compared to the Nasdaq Composite Index over the respective performance periods and subject to continuous employment through the vesting dates. The $182.15 average grant date fair value per target market-based RSU was determined using a Monte Carlo simulation approach. Compensation expense for awards with market conditions is recognized over the service period using the accelerated attribution method and is not reversed if the market condition is not met.

10. Income Taxes

For the three and nine months ended October 31, 2024, the Company recorded a provision for income taxes of $9 million and $10 million on pretax income of $25 million and $15 million, respectively. The effective tax rate for the three and nine months ended October 31, 2024 was approximately 40.4% and 69.6%, respectively. The effective tax rate differs from the statutory rate primarily as a result of a full valuation allowance against the U.S. deferred tax assets, the tax effect of foreign operations, the tax impacts of the Spera Cybersecurity, Inc. and its subsidiary (collectively, “Spera”) integration, and U.S. federal and state taxes.

For the three and nine months ended October 31, 2023, the Company recorded a tax provision of $7 million and $18 million on pretax losses of $74 million and $293 million, respectively. The effective tax rate for the three and nine months ended October 31, 2023 was approximately (9.0)% and (6.0)%, respectively. The effective tax rate differs from the statutory rate primarily as a result of a full valuation allowance against the U.S. deferred tax assets, the tax effect of foreign operations, U.S. federal and state taxes, and shortfalls from stock-based compensation.

The Tax Cuts and Jobs Act enacted on December 22, 2017 amended Internal Revenue Code Section 174 to require that specific research and experimental ("R&E") expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning in the Company's fiscal 2023. As a result, the Company has been utilizing its federal and state tax attributes and incurring cash taxes due to this provision since fiscal 2023.

11. Net Income (Loss) Per Share

The Company computes net income (loss) per share of common stock in conformity with the two-class method required for participating securities. The dilutive effect of potentially dilutive common shares included in diluted earnings per share is determined in accordance with the treasury stock, if-converted, or contingently issuable accounting methods, depending on the nature of the security.

The following table presents the calculation of basic and diluted net income (loss) per share. Net income (loss) is reported in millions and rounded from amounts in thousands; as a result, net income (loss) per share may not recalculate exactly due to rounding.

Potentially dilutive securities excluded because they would be anti-dilutive were as follows:

The Company entered into capped call transactions in connection with the issuance of the convertible senior notes. The effect of the capped calls was also excluded from the calculation of diluted net income per share as the effect of the capped calls would have been anti-dilutive.

12. Business Combinations

On February 1, 2024, the Company acquired all of the outstanding equity of Spera, an identity security platform provider. The acquisition of Spera is expected to broaden the Company's identity threat detection and security posture management capabilities. The Spera acquisition was accounted for as a business combination.

The acquisition date fair value of purchase consideration transferred for Spera of $58 million was paid in cash. Of this amount, $12 million of consideration was transferred to an escrow fund as partial security for any purchase price adjustments and indemnification obligations, and will be paid to the former Spera stockholders following the 18-month anniversary of the closing date (less any such adjustments or indemnification obligations).

The Company preliminarily recorded $18 million for developed technology intangible assets with an estimated useful life of 5 years and preliminarily recorded $42 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of Spera’s technology and the Company’s technology. None of the goodwill is expected to be deductible for U.S. federal income tax purposes. The Company may continue to adjust the preliminary purchase price allocation after obtaining more information primarily relating to income based taxes and residual goodwill through the measurement period, no more than one year from the date of acquisition.

The Company entered into revesting agreements with Spera’s founders pursuant to which 238,795 additional shares of Okta’s Class A common stock were issued as of the closing date which vest over three years. The $20 million fair value of the unvested restricted stock award is attributable to a post-combination service condition and will be accounted for by the Company separately from the business combination as stock-based compensation expense.

Acquisition related expenses incurred were not material. This acquisition did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and pro forma disclosures have not been presented.